Thursday, October 27, 2011

Our Risky Supply Chains

Recent floods in Thailand have shut down Honda's Thai assembly plant. This particular plant, where Honda produces 250,000 cars a year (or 5% of the global output) has been down since October 4. Between the supply disruptions in Japan caused by the tsunami this past spring and that Thai problems, one thing should be very clear - - the overall vulnerability and astonishing complexity of the global supply chain.

The October 27, 2011 issue of the Financial Times has an excellent article by David Pilling (Why the mad migration of parts for your iPhone matters). Pilling writes the following:

"There's a revealing story in Gordon Mathew's Ghetto at the Center of the World, a book about Chunking Mansions, the doss-house-cum-trading hub in Hong Kong. In one example of the low-end of globalization, Australian opals are shipped, via Chunking Mansions to southern China where they are polished, sent back to Australia and sold as souvenirs to Chinese tourists.

If something as straightforward as an opal can make such a circuitous journey, imagine what goes on with sophisticated electronics. Apple's gadgets, such as the iPad and iPhone, are produced in southern China in a factory owned by Taiwan's Hon Hai. But inside each shinny product are dozens of components made in Japan, Taiwan, South Korea, the US and Europe. These wing their way around the world like deranged migratory birds.

At its best, the complexity serves to raise the quality and bring down the cost of each part, hence that of the final product, by ensuring it is made in the best location. But such a tangled chain is prone to strains, particularly when it is paired with the just-in-time practices pioneered by Japan. Just as banks sought to become more profitable by reducing their capital to an absolute minimum, so companies seek to cut their inventory to a minimum."

Consider the following additional facts from the article:

Approximate 40% of the world's microcontrollers came from an area in Japan impacted by the March tsunami. The average car contains 50 of these little microcontrollers.

Spreading production around the globe, to minimize the risk of failure at one particular location, makes for a more complex supply chain.

Europe and the US cannot match production of electronics during periods of Asian disruptions - - the US has lost the ability to produce basic components like capacitors and connectors.

Specialization and supply chain risks are doubly problematic - - consider an aluminum capacitor where you need to make holes one micron deep in a sheet of aluminum 100 microns thick. Not too many places in the world with the resources to do something akin to drilling 300,000 holes into a grain of rice.